Momo (MOMO +0.00%), the top online dating company in China, bucked the Chinese economy's slowdown in 2019 as its stock surged nearly 50% year-to-date. Should investors take some profits after that big rally, or does the stock still have room to run?
Understanding Momo's business
Momo's namesake app was once a social networking app, but it has since evolved into a platform for online dating and live video broadcasts. It also acquired a dedicated dating app, Tantan, last year.
Momo generated nearly three-quarters of its revenue from its live video platform last quarter. Viewers buy virtual gifts for their favorite broadcasters, then Momo splits that revenue with those content creators. The rest of its revenue comes from ads, mini-games on Momo, and paid subscriptions for Momo and Tantan's dating services.
Image source: Getty Images.
Momo highlighted four strategies for future growth earlier this year. It's going to try to grow its users and engagement rates with more innovative products, support the "steady and healthy growth" of its live broadcasting business, grow its base of paying users, and accelerate Tantan's monetization by improving its existing premium features and adding fresh features.
New initiatives that target those goals include gamified dating experiences like its Parking Lot and Farm mini-games, which now reach half its daily active users (DAUs); a redesigned version of Momo that prioritizes live experiences; and daily updates and relationship tips on Tantan. It's also expanding beyond China into Southeast Asia and India, and its overseas revenue already accounted for over 10% of its top line in October.
Slowing growth and new challengers
Momo's revenue rose 22% annually last quarter. Monthly active users (MAUs) on its core app grew 3% annually to 114.1 million, while its total number of paying users -- including Tantan -- grew 7% to 13.4 million. Those growth rates look solid, but they represent a significant slowdown from its previous quarters:
|
YOY growth |
Q3 2018 |
Q4 2018 |
Q1 2019 |
Q2 2019 |
Q3 2019 |
|---|---|---|---|---|---|
|
MAUs* |
17% |
14% |
11% |
5% |
3% |
|
Revenue |
51% |
50% |
35% |
32% |
22% |
YOY = Year-over-year. Source: Momo quarterly reports. *Momo only.
Momo's growth decelerated for two reasons: It lapped its takeover of Tantan, and it faced allegations of inappropriate ads and content. To clean up its platforms, Momo temporarily pulled Tantan from app stores between April and July, then suspended news feed posts on both apps from May to June.
Momo's forecast for 18%-20% annual revenue growth in the fourth quarter indicates that slowdown will continue, even though its services have been fully restored. Analysts expect its revenue to rise 32% this year but dip to just 18% growth next year.
Momo hasn't faced many meaningful challengers in the past. However, Tencent (TCEHY 0.41%) -- which owns WeChat, China's top messaging platform -- recently launched three new dating-oriented apps: Maohu, which lets users chat anonymously while donning digital masks; Qingliao, which resembles Tantan; and Pengyou, a social network with opt-in matches for online dating.
Momo still has a first mover's advantage in this market, but Tencent's apps could lure away some potential users as Momo's growth slows.
Image source: Getty Images.
Decent profit growth and a cheap valuation
Momo's net income fell 11% annually to 1.92 billion yuan ($268 million) in the first nine months of 2019. However, its non-GAAP net income -- which excludes share-based compensation, acquisitions, and other one-time expenses -- rose 26% to 3.24 billion yuan ($453 million).
Analysts expect Momo's non-GAAP earnings to grow 27% this year and 20% next year, which are impressive growth rates for a stock that trades at 11 times forward earnings.
By comparison, analysts expect Tencent's revenue and earnings to both rise about 22% this year, and its stock trades at a pricier 29 times forward earnings. Tencent is larger and more diversified than Momo, but it generates revenue from volatile sectors like gaming, advertising, and cloud computing, which are more heavily exposed to macro headwinds than Momo's dating and live streaming businesses.
The bottom line
Momo had a great run this year, but I think it still has room to run next year. Its core business is well-insulated from macro pressures, it has plenty of irons in the fire, and its stock still looks cheap relative to its growth.
